Stocks like FSLR go up. And stocks like FSLR go down. That’s the case right now for First Solar, Inc. (FSLR), presenting an opportunity for a nice return on investment for bearish options traders.
I’ve been a fairly consistent and mostly a spot-on bull in FSLR over the past year.
Recently though, in early March our support of this sector leader and best-in-breed company failed to deliver and required pulling the plug on a limited-risk bull call spread.
Despite the broader market and energy sector rallying hard over the period, FSLR appears to be succumbing to pressure already witnessed by lesser solar peers SolarCity Corp (SCTY), SunPower Corporation (SPWR) or Canadian Solar Inc. (CSIQ) — and flaming out technically after a nice near-50% gain in 2015.
Don’t get me wrong. The solar industry is here to stay and I’m confident First Solar will remain a leader in the industry. But FSLR stock with this secular trend, in the near-term at least, looks like a poor return on investment.
First Solar Stock Daily Chart
As the FSLR pattern completed on top of a much larger corrective double bottom from September 2014 into late 2015, I had a couple very strong reasons for eyeing even higher prices in 2016.
At the same time, given the group’s relative weakness and minor hints of cracks in FSLR’s price chart, a 7% stop loss was advised as to not overstay a stock which could run into technical trouble.
As it turns out, First Solar stock did rally several percent. However, after testing the March and September 2014 highs near $74 – $75, a double top resulted.
And now there’s more trouble in FSLR. The low prior to First Solar’s bullish earnings report was recently undercut in the face of continued broader market strength. That’s not a good sign.
As the discouraging price action follows a broken uptrend and key technical failure at the 2014 highs, First Solar may be narrowing the price spread between itself and its lowly peers.
FSLR Bear Put Spread
Reviewing the FSLR options board, the June $57.50 / $50 bear put spread is an attractive way to start a position with modest risk and for potentially adjusting if First Solar begins trading lower.
Priced for $2 with shares of FSLR at $60.42, the out-of-the-money vertical offers a payoff in excess of 2-to-1 at $5.50 per contract if First Solar trades below $50.
Trading below $50 does require a move of 17% lower, but FSLR would still be well above the solar group. What’s more, a 30% decline from highs is not uncommon for leading stocks like First Solar when they begin to correct on the price chart.
If FSLR begins to move in the intended direction, a much smaller move could allow for a nice adjustment. One idea would be to sell a bull put spread and create a very-low-to-no-risk butterfly.
And if First Solar stock’s best-in-breed status begins to mean something again to bullish investors? A softer starting delta of 20 means if FSLR fails to flame out technically, the decision to trim losses is that much easier to appreciate on all levels.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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